What does the new National Living Wage mean for small businesses?

April 1, 2016

The new National Living Wage (NLW) comes into effect April 1st, 2016 and is the minimum wage for over 25s which is now £7.20 per hour. 1.3m workers across the UK are set to benefit, but this also affects costs to small businesses. Although small businesses only employ 35% of the adult workforce, they employ 52% of Britain’s minimum wage workers, which means costs will affect small businesses disproportionately.

Workers will benefit, but employers are looking to mitigate risks in a way that employees may not necessarily fully benefit. Many are looking for loopholes, looking at shifting to more flexible work contracts and cutting overtime pay and staff benefits and other “zero-cost” approaches. Others have considered swapping older workers for under-25s. However, these approaches will not be sustainable in the face of a rise to £9 an hour by 2020.

Economists say that for domestic businesses that face the same rise in labour costs will be able to raise prices. However, small businesses worry that higher prices will not be able to compete with larger firms who will mitigate costs in a different manner. Analysts at N+1 Singer say that although small businesses will face rising costs, it can potentially be offset by more spending by workers with higher salaries. Another potential benefit is increase in productivity and small businesses can benefit from higher worker morale.

Last year, the Federation of Small Business (FSB) surveyed how businesses adapted to the new NLW and found that 38% of small employers expect higher costs to negatively impact their business with only 6% saying that it would be a positive impact. Businesses in the wholesale and retail, as well as accommodation and food industries were most likely to say impacts would be negative. Geographically, businesses in Yorkshire, the West Midlands, Wales and South West were most likely to view impacts as negative. In response to higher prices, 52% of businesses said they would put off hiring new staff and 50% said they would raise prices.